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Self Serving

Entry 1625, on 2014-02-09 at 13:50:16 (Rating 4, Politics)

Yet again the issue of inequality is being debated here in New Zealand (and in most other parts of the world). The latest foray into this rather difficult subject has been made by a prominent New Zealand business and technology leader, Ian Taylor, who is founder and CEO of Animation Research here in Dunedin.

The Labour opposition and National government are arguing over whether inequality is getting greater or less. I thought it was considered a settled question because everything I have seen shows the situation is getting much worse and that's exactly what you would expect in an environment like the one we currently have. The National Party does have a reputation for using "creative statistics" though, so maybe they can make a case contrary to the facts like they do in so many other situations.

So back to what Taylor is saying. He claims that excessive salaries are "self serving and often cannot be defended", and that he cannot understand how a country can survive when some are paid so much and others so little. He also says that there is no need for performance bonuses because a person's salary is paid for performance anyway, and those who say "if you pay peanuts you get monkeys" have redefined what a peanut is. It is a self-perpetuating circle where public leaders insist on matching salaries with the private sector who in turn demand increases.

Apparently he practices what he preaches as well. As CEO he only makes three times more than the lowest paid employee in his company, and his salary is the same as it was 10 years ago. Plus he will accept no raise until the lowest paid in his company gets what they are worth. On the other hand, I'm not sure what he makes through shares, dividends, etc, so there could be more to this than what we see on the surface!

There doesn't seem to be much there to argue with, but Business New Zealand naturally does so anyway. They say the problem is exaggerated and has become almost a slogan of little value. According to them, in New Zealand the average CEO makes "just" 26 times the average employee, but in Australia the ratio is 100 times, in the UK 160 times, and in the US 350 times. They also say we need effective CEOs so that they can hire the people that need the work.

Right, so on to the commentary on these opinions and stats...

First, let's admit there is a problem and it is getting worse no matter what the government says. It's not just here in New Zealand of course - it probably is worse in many other countries - but that doesn't make it OK. Most people (apart from Business New Zealand and a few other extreme right wingers and libertarians) think we should aim for a more equal society, so let's do something about it.

Second, it is possible to have a successful company without paying the CEO a hugely inflated salary. Ian Taylor's company, Animation Research, should be an example. Compare that with Fonterra which lurches from one disaster to another and really only does well because China wants our milk despite the complete mismanagement of the industry; or Telecom who offer mediocre, insecure services and only succeed because of the way they manipulated their monopoly position. Do the CEOs of these (and other big corporations) deserve the pay they get? Do they deserve anything?

Is it likely that a person who runs a company simply because he is given a lot of money will be good at it? Would it not be better to get rid of that sort of person and hire someone who genuinely cares about the industry the company operates in and is prepared to settle for less pay? I couldn't find any real stats on this idea but common sense seems to indicate it has some merit. After all, by appealing to self-serving greed do we get the best type of person or the worst? Looking at the history of the appalling, incompetent, immoral individuals who have run big companies here I think the answer is clear.

Third, does a successful CEO create more jobs or less? And does he create better economic outcomes for our country or worse? I think the answer to these questions is far from clear. How often does a CEO get a bonus for reducing the workforce or outsourcing services to India? Again I have no proof, but that seems to happen far more than the opposite.

There are various mechanisms which can be used to help correct this problem. Some countries (odd that their stats weren't mentioned by Business NZ) have a maximum ratio between the workers' and the CEO's pay. Some have a limit on maximum salary. Some have a highly progressive tax system. All of these solutions have problems of their own, but they shouldn't be rejected because of that. Something needs to be done because as Taylor says: a society cannot survive with such blatant unfairness at it's very core.

Comment 1 (3881) by Steve D on 2014-02-10 at 13:37:15:

I agree.

"Performance" bonuses seem to be dished out without regard to actual performance anyway. And how would you measure performance? Would asset stripping a company, sacking workers and thus producing a "profit" count? Probably.

I like the idea of the CEO only able to get more money by making the company profitable enough to increase the lowest pay rate. If the minimum wage to maximum wage ratio in a company or country is higher than say 6 or 7, you've become a third world country.

Comment 2 (3882) by OJB on 2014-02-10 at 17:11:16:

Yes, whenever I see pay or bonuses based on "performance" it always turns out to be the people who are good at "office politics" who get them, not those who are genuinely innovative or really care about their work. In fact the bonuses encourage exactly the behaviour that we *don't* need.

If your comment about third world countries is true then I think every country is third world because this phenomenon is global. It all started getting bad during the late 70s and early 80s with Reagan, Thatcher, etc.

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